-320-
was acquired by purchase or gift. However, if appropriate,
partnership income (otherwise allocable to the donee of a
partnership interest) can be reallocated to ensure that the donor
of a partnership interest receives reasonable compensation for
services the donor renders to the partnership. Sec. 704(e)(2);
sec. 1.704-1(e)(3), Income Tax Regs. For purposes of section
704(e)(1), the determination of whether capital is a material
income-producing factor must be made with reference to all of the
facts presented in the particular case.129
As discussed in greater detail below, we agree with
respondent that, other than Kanter and Weisgal, Century
Industries’ purported partners are not to be recognized as
partners during the period 1981 to 1986 because they did not
intend to conduct a business enterprise. The contrary
recommended holding in the STJ report was manifestly
unreasonable. Inasmuch as Kanter and Weisgal were the only
partners of Century Industries recognizable for Federal income
129 In general, capital is considered a material
income-producing factor if a substantial portion of the gross
income of the partnership’s business is attributable to the use
of capital. Further, capital will not usually be considered a
material income-producing factor where the income of the business
consists principally of fees, commissions, or compensation for
personal services performed by the partnership’s members or
employees. On the other hand, capital is ordinarily a material
income-producing factor if operation of the business requires
substantial inventories or substantial investment in plant,
machinery, or other equipment. Carriage Square, Inc. v.
Commissioner, 69 T.C. 119, 126-127 (1977); sec. 1.704-
1(e)(1)(iv), Income Tax Regs.
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